FinTech and CDFIs CDFI Institute. Washington D.C., March 1, 2018

Transcription

1 FinTech and CDFIs 2018 CDFI Institute Washington D.C., March 1, 2018 Nick Elders, Community Reinvestment Fund, USA Connie Evans, Association for Enterprise Opportunity Dominik Mjartan, South Carolina Community Bank Ami Naik, Radicle Impact Partners Eben Sheaffer, National Federation of Community Development Credit Unions

2 Questions FinTech trends and the unbanked and underbanked? Best FinTech practices for CDFIs? Considerations for CDFIs in FinTech partnerships? Future for FinTech in the CDFI industry? Concerns/opportunities such as possible bias related to AI loan decisioning?

3 Payments Financing Investments FinTech Big Data Risk management Blockchain/ Cryptocurrency 3

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10 Takeaways? FinTech potential to amplify impact CDFIs should explore and engage the FinTech space Front office and back office use of FinTech Others? 10

11 FINTECH REVOLUTION IMPACT ON FINANCIAL SERVICES FOR UNDERSERVED PEOPLE AND PLACES March 1, 2018 CDFI Coalition Institute

12 What we do National trade association for US microfinance and micro business ADVOCACY & ENGAGEMENT Mission: create economic opportunity for underserved entrepreneurs nonprofit community lenders and business service providers across the country RESEARCH & INSIGHTS INNOVATION

13 Innovations Ideation & Testing TILT Forward Network: Largest and most diverse group of CDFIs and entrepreneur support organizations in the US. Network serves as skunk-works and knowledgesharing network. Reimagining TA: Findings from of an 18-month long research initiative were released in the form of a report in May Now we invite organizations to join a cohort of peers to pilot and learn from tests of new services, products and ways of delivering trusted guidance. Infrastructur e mywaytocredit: Multi-bank customer referral marketplace. Seed money for proof of concept from US Treasury Innovation Challenge. Follow-on investment from JPMorgan Chase Foundation. On track to deliver 3K customers/month to CDFIs by end of year. DreamFund: Shared utility to expand product set and create liquidity for (CDFIs) in order to serve more businesses in low-wealth communities. First-of-its-kind structure (SPV) designed by Kirkland & Ellis presents as an efficient and effective investment vehicle for CRA & mission-motivated capital. Compelling results from proof of concept.

14 Overview November 2017

15 There is a Market Failure on Main Street 8,000 DECLINED Requests for credit every business day 1 How can we solve this failure? Banks need an efficient and effective solution that is also CRA compliant. $52 BILLION OF 2.2 MILLION SMALL BUSINESSES Credit gap for loans to Main Street 2 In low-wealth communities that seek each credit year, most struggle3 CDFIs need solutions that expand product sets and reduce (or rationalize) operating costs. Investors (and Philanthropy) need investment vehicles that permit investment at scale with reasonable return expectations. Business Owners need guidance, choices, and support on the path to capital. 1 US Treasury, June Micro Capital Task Force 3 AEO, The Big Picture: A Larger View of the Small Business Market 4

16 myway to Credit Connects Small Businesses to CDFIs and Path-to-Capital Services 1 Bank refers small business to myway to Credit myway to Credit is a referral marketplace that addresses the market failure on Main Street by connecting small business ownersto business mentors and credit options from trusted community lenders. 2 Small business opts in andsubmits information 3 Business owner accepts terms and creates account 4 Business owners reviews matches to credit options and business mentors 5 Business owner selects matches

17 myway to Credit: We re Reinventing 'Yes' This solution works for everyone by enabling banks to connect small business owners to trusted lenders and business mentors. Traditional lenders funnel declined customers to community lenders who are likely to meet their needs. Easy for business owners to use because it s a single source for multiple referrals. Platform is compliant with industry standards and regulations. Easy to implement and integrate into existing operations. Small businesses are connected with lending and credit products tailored to their needs.

18 Community Lenders Identify small businesses that can benefit from lending solutions Acquire more customers at a low cost an the myway to Credit is ecosystem focused success of the owner. on business Bank Referral Partners Offer another path to yes by inviting small business owners to myway to Credit Retain relationships with small business owners without risk to reputation or risk of losses Small Business Owners Chooseproducts and services that are the best fit for their businesses More small business owners have a shot at success

19 Our Vision and Path October 2015: AEO wins CDFI Fund Innovation Challenge October 2016: myway to Credit receives $1.7M investment from JPMC Foundation November 2017: JP Morgan Chase begins referring its small business banking customers End State: Industry Shared Utility August 2016: Pilot launched with 7 CDFIs and referrals from OnDeck March 2017: Pilot launched with Woodforest National Bank

20 Innovations Ideation & Testing TILT Forward Network: Largest and most diverse group of CDFIs and entrepreneur support organizations in the US. Network serves as skunk-works and knowledgesharing network. Reimagining TA: Findings from of an 18-month long research initiative were released in the form of a report in May Now we invite organizations to join a cohort of peers to pilot and learn from tests of new services, products and ways of delivering trusted guidance. Infrastructur e mywaytocredit: Multi-bank customer referral marketplace. Seed money for proof of concept from US Treasury Innovation Challenge. Follow-on investment from JPMorgan Chase Foundation. On track to deliver 3K customers/month to CDFIs by end of year. DreamFund: Shared utility to expand product set and create liquidity for (CDFIs) in order to serve more businesses in low-wealth communities. First-of-its-kind structure (SPV) designed by Kirkland & Ellis presents as an efficient and effective investment vehicle for CRA & mission-motivated capital. Compelling results from proof of concept.

21 Community Reinvestment Fund, USA (CRF)

22 According to the Fed, how many firms applied for credit in 2016? 45% of all firms applied for credit in % of firms sought $100K or less Source: 2016 Small Business Credit Survey, Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, St. Louis

23 Once they ve decided WHY to apply, where do they apply? Banks still the primary application point. Online gaining ground. Application rate for CDFIs = Source: 2016 Small Business Credit Survey, Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, St. Louis

24 What is the approval rate for those seeking financing? Small banks with the best approval rate and largest sample size (barely). Approval rate for CDFIs = Source: 2016 Small Business Credit Survey, Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, St. Louis

25 How satisfied were the firms that received financing? Small banks, credit unions and CDFIs did well! We think we may have found an issue with the source data Source: 2016 Small Business Credit Survey, Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, St. Louis

26 What did successful borrowers cite as reasons for dissatisfaction? Online lenders cited for unfavorable repayment terms (daily withdrawals), and high interest rates Banks docked for long decision and difficult application ALL cited for lack of transparency Source: 2016 Small Business Credit Survey, Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, St. Louis

27 Let s make sure we all heard the same thing Lowest Application Rate High Lender Satisfaction Rate Highest Approval Rate NEED MORE CDFI LENDING!

28 It s hard for businesses to find us they have an enormous amount of resources available to them today: But it really varies based on: How much you need How fast you need it How good your credit is How long you ve been in business How you plan to use the money How much you are willing to pay How long you need to pay it back How much collateral you can pledge Unique to CDFIs How much impact you make in the communities we serve Source: FitBizLoans.com

29 But we also know there are gaps in the capital continuum Key takeaway: these gaps disproportionately affect minority and underserved firms Source: Next Street

30 Where is FinTech playing a role today as it relates to the mission lending industry? Current Customer Journey Current Experience v v v v Small Businesses Traditional Financial Lending Ecosystem Disqualified Expensive Online Lenders Refinance with CDFI 3

31 How can we use FinTech in our world? Build up a marketplace of responsible lenders offering tailored products to borrowers in our communities A better experience v v v Expensive Online Small Businesses Traditional Financial Lending Ecosystem Disqualified Lenders CDFI Network v Thriving Business Bringing this vision to reality is going to take a lot of hard work 3

32 Current CDFI Processing Landscape Manual, paperbased processes Fund source management Fragmented Systems Landscape Inefficient Technology Management Nascent business intelligence and performance measurement Stressed servicing and post-closing operations Staff stretched too thin Lack of scale

33 Let s use fintech to build a better processing landscape supported by technology Information Security Compliance Speed Process Transparency 3

34 If we do that, we can use our STRENGTHS! Local presence on the ground Gap fillers Responsible and relationship-based Distributed Network Business Advisory Services Regulatory Advantage

35 How else should we think about differentiating as in industry? Transparent pricing and terms Non-abusive products Responsible underwriting Fair treatment from brokers Inclusive credit access Fair collection practices 3

36 Recommendation: Really take a hard look at all the things you are doing as an organization and ask the hard question: Do I have to do all this? Technology Infrastructure Customer Acquisition Process Optimization New Product Development Balance Sheet Management Information Security Program Compliance Customer Experience